Cross border insolvencies and financial restructurings are remarkably opaque considering we live in the Information Age. The mission of the Centre of Main Interest (the COMI) is to light some candles in the darkness and create a forum for further discussion. The Law Offices of Tally M. Wiener, Esq. are pleased to publish the COMI blog.
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Tuesday, January 8, 2013

Rescued by a Bailout, A.I.G. May Sue Its Savior

Per The New York Times Dealbook
(http://dealbook.nytimes.com/2013/01/07/rescued-by-a-bailout-a-i-g-may-sue-its-savior/?ref=business&pagewanted=print):

Fresh from paying back a $182 billion bailout, the American International Group has been running a nationwide advertising campaign with the tagline "Thank you America."

Behind
the scenes, the restored insurance company is weighing whether to tell
the government agencies that rescued it during the financial crisis:
thanks, but you cheated our shareholders.

The board of A.I.G. will
meet on Wednesday to consider joining a $25 billion shareholder lawsuit
against the government, court records show. The lawsuit does not argue
that government help was not needed. It contends that the onerous nature
of the rescue - the taking of what became a 92 percent stake in the
company, the deal's high interest rates and the funneling of billions to
the insurer's Wall Street clients - deprived shareholders of tens of
billions of dollars and violated the Fifth Amendment, which prohibits
the taking of private property for "public use, without just
compensation."

Maurice R. Greenberg,
A.I.G.'s former chief executive, who remains a major investor in the
company, filed the lawsuit in 2011 on behalf of fellow shareholders. He
has since urged A.I.G. to join the case, a move that could nudge the
government into settlement talks.

The choice is not a simple one
for the insurer. Its board members, most of whom joined after the
bailout, owe a duty to shareholders to consider the lawsuit. If the
board does not give careful consideration to the case, Mr. Greenberg
could challenge its decision to abstain.

Should Mr. Greenberg
snare a major settlement without A.I.G., the company could face
additional lawsuits from other shareholders. Suing the government would
not only placate the 87-year-old former chief, but would put A.I.G. in
line for a potential payout.

Yet such a move would almost
certainly be widely seen as an audacious display of ingratitude. The
action would also threaten to inflame tensions in Washington, where the
company has become a byword for excessive risk-taking on Wall Street.

Some
government officials are already upset with the company for even
seriously entertaining the lawsuit, people briefed on the matter said.
The people, who spoke on the condition of anonymity, noted that without
the bailout, A.I.G. shareholders would have fared far worse in
bankruptcy.

"On the one hand, from a corporate governance
perspective, it appears they're being extra cautious and careful," said
Frank Partnoy, a former banker who is now a professor of law and finance
at the University of San Diego School of Law. "On the other hand, it's a
slap in the face to the taxpayer and the government."

For its
part, A.I.G. has seized on the significance and complexity of the case,
which is filed in both New York and Washington. A federal judge in New
York dismissed the case, while the Washington court allowed it to
proceed.

"The A.I.G. board of directors takes its fiduciary duties
and business judgment responsibilities seriously," said a spokesman,
Jon Diat.

On Wednesday, the case will command the spotlight for several hours at A.I.G.'s Lower Manhattan headquarters.

Mr.
Greenberg's company, Starr International, will begin with a 45-minute
presentation to the board, according to people briefed on the matter.
Mr. Greenberg is expected to attend, they added.

It will be an
unusual homecoming of sorts for Mr. Greenberg, who ran A.I.G. for nearly
four decades until resigning amid investigations into an accounting
scandal in 2005. For some years after his abrupt departure, there was
bitterness and litigation between the company and its former chief.

While
the discussions are part of an already scheduled board meeting,
securities lawyers say it is rare for an entire board to meet on a
single piece of litigation.

"It makes eminent good sense in this
case, but I've never heard of this kind of situation," said Henry Hu, a
former regulator who is now a professor at the University of Texas School of Law in Austin.

It
is unclear whether the directors are leaning toward joining the case.
The board said in a court filing that it would probably decide by the
end of January.

Until now, the insurance giant has sat on the
sidelines. But its delay in making a decision, some officials say, has
drawn out the case, forcing the government to pay significant legal
costs.

The presentations on Wednesday come on top of hundreds of
pages of submissions that the government prepared last year, a
time-consuming and costly process. The Justice Department, which
assigned about a dozen lawyers to the case and hired outside experts,
told a judge handling the matter that Starr was seeking 16 million pages
in documents from the government.

"How many?" the startled judge, Thomas C. Wheeler, asked, according to a transcript.

Struck just days after the collapse of Lehman Brothers
in September 2008, the bailout of A.I.G. proved to be among the biggest
and thorniest of the financial crisis rescues. The company was on the
brink of collapse because of deteriorating mortgage securities that it
had insured through credit-default swaps.

Starting
in 2010, the insurer embarked on a series of moves aimed at repaying
its taxpayer-financed bailout, including selling major divisions. It
also held a number of stock offerings for the government to reduce its
stake, which eventually generated a roughly $22 billion profit.

Overseeing
that comeback was a new chief executive, Robert H. Benmosche, a
tough-talking longtime insurance executive. Mr. Benmosche has won
plaudits, including from government officials, for his managing of
A.I.G.'s public relations even as he helped nurse the company back to
financial health.

But he and the rest of A.I.G.'s board must now confront an equally pugnacious predecessor in Mr. Greenberg.

In the case against the government, Mr. Greenberg, through his lead lawyer, David Boies,
contends that the bailout plan extracted a "punitive" interest rate of
more than 14 percent. The government's huge stake in the company also
diluted the holdings of existing shareholders like Starr, which at the
time was A.I.G.'s largest investor.

"The government has been
saying, 'We're your friend, we owned and controlled you and we let you
go.' But A.I.G. doesn't owe loyalty to the government," a person close
to Mr. Greenberg said. "It owes loyalty to its shareholders."

The
government, Starr argues, used billions of dollars from A.I.G. to settle
credit-default swaps the insurer had with banks like Goldman Sachs. The deal, according to the lawsuit, empowered the government to carry out a "backdoor bailout" of Wall Street.

Starr
argued that the actions violated the Fifth Amendment. "The government
is not empowered to trample shareholder and property rights even in the
midst of a financial emergency," the Starr complaint says.

The
Treasury Department declined to comment. A spokesman for the Federal
Reserve Bank of New York, Jack Gutt, said, "There is no merit to these
allegations." He noted that "A.I.G.'s board of directors had an
alternative choice to borrowing from the Federal Reserve, and that
choice was bankruptcy."

A federal judge in Manhattan agreed,
dismissing the case in November. In an 89-page opinion, Judge Paul A.
Engelmayer wrote that while Starr's complaint "paints a portrait of
government treachery worthy of an Oliver Stone movie," the company
"voluntarily accepted the hard terms offered by the one and only rescuer
that stood between it and imminent bankruptcy."

The United States
Court of Appeals for the Second Circuit recently agreed to review the
case on an expedited timeline. The judge in the United States Court of
Federal Claims in Washington, meanwhile, has declined to dismiss the
case and continues to await A.I.G.'s decision.